What Is Sweat Worth? By Dave Pratt, owner of Ranch Management Consultants
Most family ranches are subsidized with free, or underpaid, family labor. Sometimes the difference between what family members get and what it would cost to hire someone else to do the work they do is made up with the promise or expectation of sweat equity. But sweat is not a recognized form of currency and people counting on sweat equity usually have a grossly exaggerated idea of what their sweat is worth. This often leads to serious disagreement and disappointment.
If you are going to count on sweat equity and want to avoid the inevitable misunderstandings that happen when it comes time to cash in on your sweat, then you’d better start actually counting it. How many hours? For how many years? At what rate of pay? With what interest on the unpaid balance?
I mentioned the perils of relying on sweat equity in a workshop recently. I suggested we stop using the term sweat equity and call it what it really is, “deferred wages.” My comments apparently struck a nerve with one 30-something rancher. He approached me after the program and asked if I could help him calculate what his sweat was actually worth. He said that he’d come back to the family ranch after college 10 years earlier. He’d been drawing a low wage and banking on sweat equity. As is usually the case in family ranches, there was no formal agreement documenting exactly what his sweat was worth.
He was being paid $25,000 a year, but his compensation package included a nice home, a vehicle and insurance for his family. All-in-all a compensation package worth well over $50,000. “Maybe I’m not as underpaid a I thought I was,” he said.
I suspect that he was probably being underpaid somewhere between $10,000 to $20,000 a year. I showed him that for every $10,000 he’d been underpaid, he earned 0.1% equity in his family’s $10,000,000 ranch.
($10,000 ÷ $10,000,000) x 100 = 0.1%
I showed him that over the previous 10 years, compounding interest at a rate of 3.5%, he’d earned a whopping 1.2% equity stake in the ranch. Like a lot of young ranchers returning home, he hadn’t ever thought about how much his sweat was worth but had assumed that it would add up to a lot more than that.
Sometimes sweat equity isn’t just about compensating someone for the work they do. It’s about acknowledging the sacrifices someone may have made, foregoing other opportunities to come back to the ranch to support the family. If there are several kids in your family, but only one has invested time and energy working on the place and has shown a desire to continue the business, it may be fair to give them an equity position. After-all, as succession planning advisor Don Jonovic points out, fair doesn’t necessarily mean equal.
But whether sweat equity is a substitute for a paycheck or acknowledging a sacrifice, we need to be clear about what we are compensating and its value. We need to convert assumptions and expectations into agreements. We need to figure out what our labor is worth (the topic of the last ProfitTips column). We need to document the value of our sweat while we are still sweating.
For more on documenting the value of sweat equity watch the video below:
Investment – an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.
Job – a paid position of regular employment. a piece of work, especially a specific task done as part of the routine of one’s occupation or for an agreed price. Everyone has goals in life – some will involve being financially secure. If you are interested in building financial wealth, there are a few basic premises which need to be incorporated into your plans.
1) Your saved dollars must be put to work!
2) Break free from the bondage of financial slavery by changing your spending habits
3) Invest in yourself – education or your own business
4) Learn to manage the money you do have – more money will not necessarily fix your financial problems
5) Debt is a hard task master – avoid it!
6) Use your income from a paid job to make investments that will gain in value while you continue your paid job. Later you can retire from your job and enjoy your investments.
Many, many economic experts have different ideas about how to invest, so it’s up to you to decide who or what you want to invest in.
Dave Pratt, owner of Ranch Management Consultants (formerly known as Ranching for Profit) hits it on the head again with another great blog entry. Although his niche is specifically ranching, the ideas he shares are often for any business.
Home > A Great Place To Raise A Family
I occasionally lead workshops I call Hard Work and Harmony: Effective Relationships In Family Businesses. In it I like to ask participants to explain to the person next to them why they ranch. Some say they love being their own boss, or love working outdoors and with livestock. Almost all of them say something about loving the lifestyle. Near the top of most people’s lists is, “It’s a great place to raise a family.”
I agree. I grew up on a small place. The biology lessons I learned from tending livestock were more influential than any I ever had in a classroom. I learned other lessons too. I learned how to work hard and how to be resourceful. But it wasn’t just about work. Our place was a great setting for any adventure my imagination could conjure up. My mom sold it when I was in college and it just about broke my heart.
A ranch can be a great place to raise a family, but it isn’t always. I worked with a rancher shortly after my son, Jack, was born. When we broke for lunch he asked about my new baby. I told him that when they placed Jack in Kathy’s arms for the first time, I could hardly see him for the tears of joy streaming down my face. Tears welled up in his eyes too, but they weren’t tears of joy. Trying to hold back a flood of emotion, he told me how he had worked sun up to sun down to build a place “for the generations to come.” He said that he hadn’t been as involved in his children’s lives as he should have been. As we sat on the hill, he told me that now he rarely hears from his adult children, who want no part of the ranch. A ranch can be a great place to raise a family, but it is not a substitute for our active involvement in family life.
Many ranchers are addicted to work. I’ll bet you’ve even heard some of your colleagues brag about how long and hard they work, proudly proclaiming things like, “I haven’t taken a vacation in 20 years.” They say it as though it is something to be proud of. When I hear things like that I shake my head wondering, “Are things that bad?” You can’t run a sustainable business on unsustainable effort.
Intentional or not, work can become an excuse to avoid working through the issues every healthy family faces at one point or another. When work consistently takes precedence over family needs, we set ourselves and our families up for trouble. Engaging in what may be uncomfortable conversations when issues first come up can keep them from growing into big problems.
In the last few months I’ve met a number of people who are learning that lesson the hard way. After decades of avoiding uncomfortable family issues they are facing extremely difficult challenges regarding succession. Now, without any experience working with one another to resolve small issues, they are hoping to work through the most difficult challenges many of us will ever face. The conversations are made even more difficult because of the hurts that have gone untended and the resentments that have grown from not taking care of the family in the family business. It’s a tough way to learn that success has more to do with healthy relationships than with conception rates and balance sheets.
I don’t mean to suggest that the physically demanding work that ranches require can be ignored, but it doesn’t have to be all consuming. Many Ranching For Profit School alumni have discovered that the ranch was all consuming only because they allowed it to be that way. After the school they restructured the business to increase profit and liberate their time to put more life in their work/life balance. They still work as hard as anyone, just not as long. Their ranches are great places to raise their families, andthey actually take the time and make the effort to be directly involved in raising them.
To hear how one RFP alumnus decreased the work required to run their ranch while increasing profit and improving their quality of life, click here.
Most people blame things beyond our control like the weather, government regulation, low commodity prices and increasing costs for their failure to make a healthy profit. These are the things most often discussed at producer meetings and in the coffee shop. These are also things we can do little about. Making them the scapegoats for poor performance makes it easy to absolve ourselves of responsibility. But if prices, costs, weather and regulation really determine profit or loss, why do some businesses survive, even thrive, in these conditions while others fail? Depressed markets are a crisis for some but a profitable opportunity for others. It is not the situation, but the decisions we make that determine success or failure.
According to the US Small Business Administration, most new businesses fail. Fewer than 10% survive to see their 10th year. In his best-selling book, The E-myth Revisited, Michael Gerber points to an exception. He says that 97% of new franchises survive beyond 10 years. Why the difference? Simply put, franchises have a clear-cut blueprint on how to run a business. McDonalds doesn’t succeed because they make the best hamburgers or because they hire the smartest, talented people to work behind the counter. Over the years they have achieved economies of scale and have a lot of clout when it comes to negotiating lower costs with their suppliers. But they wouldn’t have been in the position to do that if they hadn’t built a business that actually works. They didn’t grow first and then figure it out. They figured it out and then they grew.
As Gerber puts it, they worked on the business (WOTB) to build a business that actually works. We are so busy working in the businesses (WITB) doing $10/hour jobs that we often don’t ever get around to working on our businesses (the $100/hour work). This is the work that determines the winners and the losers in any business…including yours. More than genetics, prices, weather or any other factor, it is this issue that separates the men (and women) from the boys
(and girls) in ranching.
Our ranches suffer economically, financially and ecologically when WOTB takes a back seat to WITB. Our failure to effectively work on our businesses is the single biggest reason that most ranches aren’t profitable and that most ranches don’t survive generational succession with their land or family intact.
It doesn’t have to be this way. Ranching can make a healthy profit, thrive ecologically, stay in the family indefinitely and be the stimulus for revitalizing rural communities. You put your ranch on the path to achieve these results when you put the shovel down and pick up the pencil … when you start working on it, not just in it.
I’ve heard some complain that they don’t like working on their business. I wonder if the real problem is that they don’t know how to work on it. Previous generations may have been able to get by without WOTB when land values were cheaper and their ranch had only been split once by a generational transfer. But times and conditions have changed. What passed for management then, doesn’t pass muster now.
Score yourself to see how effectively you are working on your business:
Scoring: 0 = I have not addressed this issue
5 = I have addressed the issue but have more work to do
10 = This describes my business.
If you scored more than 70, congratulations! You probably have a healthy business with a promising future. If you scored 40 to 70, you’ll be feeling the pinch but will probably continue to get by with off-farm income subsidizing the place … at least until it comes time to pass the ranch on to the next generation. If you scored less than 40, you might want to think about going to work as a cowboy for someone else. If you want a good job, I suggest you hire on with someone who scored more than 60. He’s the one who’s Ranching For Profit.